Thanks everyone for your thoughts. I have a sick child at home so I haven't had a chance to come here since last night.
LisaCA, there are very few AA's in our community. Over the past several years the number has increased, due in a large part to adoptions. As far as a school with more AA kids (there are a few biracial kids at this school), I doubt there is one with a higher percentage than where my kids already are. If we had an option of a more diverse school, I would have been fighting for it years before our DD hit Kindergarten. Transferring to a different school is out of the question, I'm quite sure. We've been fighting with the school district on issues with our DS, who is mentally impaired, for almost 2 yrs. now, so I don't see getting anywhere based solely on the lack of other AA kids at the school.
Moving to an even larger community/suburb isn't possible without leaving everything we have behind, including my DH's job of 15 years (we'd have to move at least 2 hours away).
Transferring schools and/or moving our family isn't an option. We learned long ago that we have to stand our ground and fight for our rights, and the rights of our children. I do agree that our kids need to see themselves reflected in a positive way. Just because there are mainly CC kids in their school doesn't mean they should be viewed in a negative way. We believe it is our responsibility to educate, and even FORCE diversity, in our community. Our childrens generation deserves not only book knowledge, but also personal contact with children from other heritages and cultures. We look at it as educating our corner of the world. We knew it wouldn't be easy.
When something like this comes up, I feel even stronger about adopting more children to not only raise the AA percentage in our town (LOL), but mainly so our DD has someone IN HER HOME, that she can relate to and form a bond with that she can't get with her friends, or even with us. Yes, DS is AA, but being mentally impaired he doesn't understand many things, including adoption, black/white differences, and racism. His adaptive level is that of a 3 yr. old. I am vanilla and he is chocolate, and that's how he sees his world.
I'm sorry for getting side tracked!

I didn't think a short response like "LisaCA, a different school and community isn't an option" would be enough! LOL!
As far as those who stated they'd want to know if their child said something offensive, I agree. However, I'm not going to lay money down that the parents of these children feel the same way! Every parent/family is different.
Crick, you said, "If my child asked that question of another child, I'd know they were asking out of curiousity from something they heard, and not because of racism." I see your point, and I hope that is all the question was to my DD. However, I can't help feeling there is more going on when a 5th grader asks my 3rd grader if she is a "N" word. I just don't see it as ONLY curiousity.
The principal hasn't called me back yet, so I'm waiting on him before I take any steps!